For consistent readers of this report, you have probably noticed that over the past two months the first sentence of this report has been relatively consistent: “Nothing in the physical market changed last week and the spot price continued to push higher.” Without flashy headlines there is a possibility of becoming complacent or numb to what is happening within the market. While this week is filed in the same “Nothing significantly changed” category, it is important to take a step back and evaluate what that means for prices. Since the beginning of June, the TSI Platts Midwest HRC price has increased by $237. On top of that, the price officially doubled its 2018 peak of $920. With that context in mind, it should be clear that when we say nothing has changed, we mean the market remains in a demand driven shortage and the rally continues.

Outside of the U.S., the major news of the week came from China, as the 13% export rebate was removed for most remaining steel products which were not included in the May 1^st policy change. The driving principle behind these decisions continues to be the expressed effort to reduce pollution by removing incentives to produce and export steel. So far, they have not been as successful as the market initially expected. The chart below shows Chinese HRC 2^nd month Future price and rolled steel output in millions of tons.

While this recent decision did not come as a surprise, it should be noted that the products effected are more value-added products (i.e., cold-rolled & galvanized). The data shows that production out of China remains elevated, due to the fact exports are still very profitable, even without the rebate, reflecting the elevated levels of demand globally. At the same time, there is a seasonal nature to Chinese steel production and current levels are expected to begin decreasing shortly. The overriding factor of the global market is that there is not enough material to satisfy demand. Until equilibrium is reached, there will be sustained upward pressure on steel prices and any restrictions on supply could extend the timeline. As the world’s largest producer and exporter, China will have an outsized impact on these dynamics. If they continue down this path, the question of “Will you be able to get the material you need over the next 12 months?” becomes more difficult to answer with a yes.